FTC finds YouTube network used deceptive practices in Xbox One advertising (correction)

Machinima paid YouTubers up to $30,000 to say positive things about the Xbox One, as part of a secret 2013 agreement with Microsoft about an advertising campaign, according to a Federal Trade Commission investigation made public today.

The agreement, which YouTubers were contractually blocked from discussing, included talking points, suggested video cuts and required that the videos not say anything negative about the console or its launch titles, according to the Federal Trade Commission.

In announcing the details of its investigation today, the Federal Trade Commission ruled that Machinima engaged in deceptive advertising in creating the YouTube marketing campaign.

The commission proposes that Machinima be prohibited from similar deceptive conduct in the future and that the company, which has agreed to settle with the FTC, be required to ensure its influencers clearly disclose when they have been paid for an endorsement. Finally, Machinima would be obligated to check up on its YouTubers 90 days after a video is posted.

"In truth and in fact, the video reviews for Xbox One and the Launch Titles did not reflect the independent opinions of impartial video game enthusiasts." - FTC

The FTC is not able, under its mandate, to seek civil fines without an order in place, FTC spokesman Jay Mayfield told Polygon. Though if an order is in place and later broken it can result in a civil penalty of up to $16,000.

Mayfield said this is the first time the FTC has issued an order concerning deceptive advertising by YouTube creators.

"When people see a product touted online, they have a right to know whether they're looking at an authentic opinion or a paid marketing pitch," said Jessica Rich, Director of the Bureau of Consumer Protection. "That's true whether the endorsement appears in a video or any other media."

Neither Microsoft nor Starcrom were cited for wrongdoings in the order. According to a letter written to Microsoft:

"The failures to disclose here appear to be isolated incidents that occurred in spite of, and not in the absence of, policies and procedures designed to prevent such lapses. Microsoft had a robust compliance program in place when the Xbox One campaign was launched, including specific legal and marketing guidelines concerning the FTC's Endorsement Guides, 16 C.P.R. Part 255, and relevant training made available to employees, vendors and Starcom personnel. Since the Xbox One campaign, Microsoft and Starcom have adopted additional safeguards regarding sponsored endorsements, and they have committed to, among other steps, specifically requiring their employees to monitor influencer campaigns conducted by subcontractors in the future. In addition, Microsoft and Starcom took swift action to require that Machinima insert disclosures into the campaign videos once they learned that Machinima had paid the influencer and that no disclosures had been made."

Under the conditions of the 2013 agreement between Microsoft and Machinima, the YouTube "influencers" would not portray Microsoft, the Xbox One or the launch games for the console in a negative light, according to the FTC complaint.

The advertising campaign was broken down into two phases, each with very specific rules about what content should be included in the videos, according to the complaint.

Phase one

Phase one had five of Machinima's influencers produce and upload two video reviews each with explicit instructions about the content of those videos.

Instructions included using a montage of Xbox 360 games, mentioning two or three things that the YouTuber is looking forward to in the Xbox One and showcasing Microsoft products in a positive light.

When the videos were uploaded in November, Microsoft and Starcom reviewed them before paying Machinima, according to the complaint.

While the complaint references that a number of YouTubers participated, only two were named specifically. According to the complaint, Adam "SkyVSGaming" Dahlberg was paid $15,000 for the two videos he created following the rules and Tom "TheSyndicateProject" Cassell was paid $30,000. Neither disclosed they were paid to create the videos.

Phase two

Phase two of the program paid unnamed influencers $1 for every 1,000 views, with a cap of $25,000, for creating a video praising the Xbox One and launch titles for the console.

Not only were these video makers not asked to disclose the agreement, they signed contracts that prohibited them from disclosing anything in the agreement. Between Nov. 22 and Dec. 31, 2013, Machinima uploaded more than 300 videos as part of the campaign.

We've reached out to Microsoft and Machinima for further comment on this practice and will update the story when they respond.

When the agreement was initially brought to light in January, 2014, the two companies issued a joint statement which seems to, in part, contradict the FTC's findings:

"This partnership between Machinima and Microsoft was a typical marketing partnership to promote Xbox One in December. The Xbox team does not review any specific content or provide feedback on content. Any confidentiality provisions, terms or other guidelines are standard documents provided by Machinima. For clarity, confidentiality relates to the agreements themselves, not the existence of the promotion."

The proposed agreement and order will remain open for the next 30 days, allowing the public to comment on the case. (You can do so here.) After the Oct. 2 deadline for comment, the commission will decide whether to make the proposed consent order final.

Update: Machinma responded with the following comment:

Machinima is actively and deeply committed to ensuring transparency with all of its social influencer campaigns.  Through collaboration with the FTC, we are pleased to have firmly resolved this matter, related to an incident that occurred in 2013, prior to Machinima's change of management in March 2014. We hope and expect that the agreement we have reached today will set standards and best practices for the entire industry to follow to ensure the best consumer experience possible.

Correction: We have changed the headline to remove the word "guilty," In the agreement, Machinima neither denies nor admits any of the allegations, though it does admit the facts as presented by FTC.